The South China Sea’s Geopolitical Tension and Economic Implications
Introduction and Current Activity
Recently, China has ramped up commercial and military activity in the South China Sea, too close to comfort for many island nations including Taiwan, which feels that its sovereignty is being unjustly threatened. For the US, this will surely pull it and its allies into the mix, which only threatens more conflict.
History and Geopolitical Context
Although it seems like China and Taiwan have been around as rival nations forever, they cropped up as a major issue in the 20th century, and continue to be an issue. The roots of the issue trace back to the Chinese Civil War (1927–1949), which ultimately led to the establishment of the People’s Republic of China (PRC) on the mainland under the Communist Party, and the retreat of the Republic of China (ROC) to the island of Taiwan. China considers Taiwan a part of its territory, while Taiwan sees itself as a separate, sovereign state. The United States has taken a more “neutral” stance, as it needs to affirm the democracy in Taiwan for political reasons while continuing to trade with China for economic reasons. Therefore, the US is cautious to lend too much favoritism to either side, but with the recent heated politics, it may be forced to intervene.
While adhering to the One-China policy, the U.S. also provides military support to Taiwan, leading to diplomatic friction with the PRC. Additionally, other countries face similar challenges with this scenario, since it’s usually hard to make a binary choice to omit one country and fully welcome another as an ally.
Economic Implications
Mainland China is Taiwan’s largest trading partner, and many Taiwanese companies have significant investments in the mainland. However, this situation becomes a lot more complicated when we involve the US. For example, many US firms rely on technology from Taiwan, including supercomputers and semiconductor chips, while China sees Taiwan as a major target for technological and economic dominance.
CNBC shows that the semiconductor business is a large motivator for all stakeholders — from businesses to governments, to ensure peace while attempting to cut a larger slice of the pie for themself.
Solutions
While I recognize it’s very difficult for anyone to singlehandedly solve a developing crisis as big as this one, I personally think trade streamlining would serve a big role in deescalating the situation. Strengthening existing trade agreements and forging new ones can create stability and predictability in economic relations. This approach helps in securing markets for American goods and services while reducing reliance on specific regions. It would also help China and Taiwan if, but only if the US can get them both “at the table” to negotiate security in exchange for some level of mutual economic benefit.
Future Outlook and Conclusions
As major players in the global economy, any escalation in tensions between China and Taiwan may create volatility in financial markets. Even domestically, we see US investors jump at any news from the Federal Reserve, so I’m sure any potential conflict between China and Taiwan would result in major volatility and ruin for the global economy. US businesses both in the region and at home have a lot to lose, but the US needs to thread the needle perfectly, as China is tightening it’s policy on Taiwan and asserting military dominance in the South China Sea.
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